Chapter 10
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The receipt of an order for a product when no units are in inventory. These are eventually satisfied when a new supply of the product becomes available.
Backorder
An assumption of many inventory models that states that the same number of units are taken from inventory each period of time.
Constant demand rate
A situation in which the inventory is built up at a constant rate over a period of time.
Constant supply rate
A system in which the inventory position is monitored or reviewed on a continuous basis so that a new order can be placed as soon as the reorder point is reached.
Continuous review inventory system
The cost a firm incurs to obtain capital for investment. It may be stated as an annual percentage rate, and it is part of the holding cost associated with maintaining inventory.
Cost of capital
The length of time between the placing of two consecutive orders.
Cycle time
A model where demand is considered known and not subject to uncertainty.
Deterministic inventory model
The order quantity that minimizes the annual holding cost plus the annual ordering cost.
Economic order quantity (EOQ)
A cost associated with a backorder, a lost sale, or any form of stock-out or unsatisfied demand. This cost may be used to reflect the loss of future profits because a customer experienced an unsatisfied demand.
Goodwill cost
The cost associated with maintaining an inventory investment, including the cost of the capital investment in the inventory, insurance, taxes, warehouse overhead, and so on. This cost may be stated as a percentage of the inventory investment or as a cost per unit.
Holding cost
A method used to determine an optimal order quantity by comparing the cost of ordering an additional unit with the cost of not ordering an additional unit.
Incremental analysis
The inventory on hand plus the inventory on order.
Inventory position
The time between the placing of an order and its receipt in the inventory system.
Lead time
The number of units demanded during the lead-time period
Lead-time demand
The distribution of demand that occurs during the lead time period.
Lead-time demand distribution
The order quantity in the production inventory model.
Lot size
The fixed cost (salaries, paper, transportation, etc.) associated with placing an order for an item.
Ordering cost
A system in which the inventory position is checked or reviewed at predetermined periodic points in time. Reorders are placed only at periodic review points.
Periodic review inventory system
A model where demand is not known exactly; probabilities must be associated with the possible values for demand.
Probabilistic inventory model
Discounts or lower unit costs offered by the manufacturer when a customer purchases larger quantities of the product.
Quantity discounts
The inventory position at which a new order should be placed.
Reorder point
Inventory maintained in order to reduce the number of stock-outs resulting from higher-than-expected demand.
Safety stock
The fixed cost (labor, materials, lost production) associated with preparing for a new production run.
Setup cost
Occurrence when demand cannot be supplied from inventory.
Shortage or stock-out